CITY FOCUS by ALEX BRUMMER: IMF to stick with old guard

The scandal which has erupted around International Monetary Fund managing director Dominique Strauss-Kahn presages a new period of uncertainty for the Washington-based emergency lender and policy adviser.

The global financial panic and recession which brought such misery to people around the world in terms of higher unemployment and squeezed living standards gave the IMF a new lease of life.

Strauss-Kahn, a former French finance minister and economics professor, was the right man at the right place at the right time.

Leading the way: Dominique Strauss-Kahn was instrumental in expanding control to BRIC economies

A domineering figure, with a sharp intellect and tongue, he managed to position the IMF at the centre of the crisis, first responding to countries – mainly in Eastern Europe – hit by the banking panic and more recently injecting the Fund into the euroland sovereign debt catastrophe.

His political clout within Europe, particularly a close relationship with German chancellor Angela Merkel, allowed the Fund to punch above its weight in complex negotiations from which it could easily have been excluded.

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It had always been expected that Strauss-Kahn, known as DSK in France and at the Fund, would step down soon to run for the French presidency.

But his political future hangs in the balance after he was yesterday charged with attacking and attempting to rape a hotel maid in a New York hotel at the weekend.

Speculation about potential successors was the talk of the corridors at the spring meeting of the Fund in April when Gordon Brown was mentioned as a possible successor, but one unacceptable to the British government.

Chancellor George Osborne was thought to favour French finance minister Christine Lagarde. Matters at the Fund have been complicated by two developments.

Last week the senior managing director John Lipsky, the former chief economist at JP Morgan Chase, announced he would not seek a second term in the job and would be leaving in August.

Lipsky, who has played a key role in the detailed negotiations with Greece, Ireland and Portugal, now finds himself in charge. The second factor is much more organisational. One of DSK’s triumphs – actually encouraged by Gordon Brown’s reinvention of the G20 – was reform of the way the IMF is run.

Essentially DSK persuaded ‘Old Europe’ to relinquish some of its shareholding and voting power at the Fund so as to give more control to the BRIC economies – Brazil, Russia, India and China.

As part of the deal it was agreed that in future there would be an ‘open contest’ for managing director – involving all nationalities – instead of the default European choice. Europeans have headed the IMF since its foundation at Bretton Woods in 1944 with French candidates holding the top job more than any other country.

However, because the Europeans have only recently relinquished voting power at the Fund (where the Americans remain the biggest shareholders) it has been widely understood Europe would have one more go.

It is also possible that whatever the fate of DSK, the French may argue they have a right to serve out the rest of the current term which comes to an end in 2012. A number of emerging market names already are being canvassed as possible DSK successors.

Most mentioned is Trevor Manuel, the former South African finance minister, who led the Commission which forced through modernisation. Other contenders include former Turkish finance minister Kemal Dervis, now at the Brookings think tank in Washington, and former deputy managing director Stanley Fischer, governor of the Bank of Israel.

Fischer was among the favourites for the post last time but was defeated by his US citizenship, despite being born and educated in Zimbabwe. Under his leadership Israel has enjoyed a remarkable inflation free economic renaissance.

However, with the focus of so many global policy makers currently on Europe’s sovereign debt crisis and the potential impact which the domino effect of a series of defaults could produce, the betting in the US is that the job will go to a European who understands the dynamics of the eurozone.

There will also be anxiety the selection of an emerging market candidate might be seen as a move too far in deviating from the IMF’s traditional austerity role. Under DSK, the IMF has tried to show its kinder and gentler side.

But the reality is that when it comes to resolving the problems of nations in crisis there has to be a trade-off between austerity and privatisation for cash.

In fact, in Europe the IMF has been positioned as the fiscal policeman because of the inability of Brussels to force its will.

DSK’s departure may not help the case, for instance, of Lagarde. But the Europeans can be expected to dig in their heels in the hope of keeping the job in their own hands.